For two decades, India’s urban policy has been anchored in infrastructure expansion. The Union Budget 2025-26, presented by Union Finance Minister Nirmala Sitharaman on February 1, continues this trend, with a 17% increase in allocation for the Ministry of Housing and Urban Affairs over the previous year's estimates and a renewed push to make urban development a key pillar of India's transformation.
Yet, this infrastructure-led growth perspective continues to sideline a critical reality—Indian cities are choking under worsening air pollution, depleting water reserves, and mounting climate risks. There is no denying the fact that the cities are growth engines and need better infrastructure. However, without a course correction integrating environmental resilience into urban planning, these growth engines could sputter, jeopardising the economic ambitions they are meant to drive.
The Economic Survey 2025 identified climate change adaptation as a key policy priority to achieve the Viksit Bharat goals. This vision is, however, not reflected in the urban sector allocations, and there are no specific financial commitments to meet environmental concerns. Instead, the budget has taken a supply-side route by facilitating electric mobility. However, to what extent such macro strategies help reduce carbon emissions and traffic gridlock in real life would depend upon city-level adaptation strategies.
A case in point is the massive budgetary support for metro rail systems, which are coming up in over 20 cities, including many Tier II and Tier III cities. Fund allocation for metro projects had gone up from Rs 21,336 crore in FY 2024-25 to Rs 31,240 crore in FY 2025-26. However, their effectiveness as urban mass transit solutions is questionable, as even big cities like Bengaluru, Jaipur, and Lucknow struggle to raise ridership. Metro systems work best in cities having high population density with a mix of residential and commercial activities along the transit corridors, integration with other transportation interchange points (like bus terminus, rail stations, and airports), and of course, efficient last-mile connectivity. Otherwise, they face the risk of turning into white elephants.
New Challenge Fund for bankable projects
The budget reiterates the importance of market-based financing of urban infrastructure projects. A new Challenge Fund with a substantial corpus of Rs one lakh crore was announced to attract private investment to develop ‘Cities as Growth Hubs’, ‘Creative Redevelopment of Cities,’ and ‘Water and Sanitation’ infrastructure through bankable, financially viable projects. As stated by the Finance Minister, this fund would finance up to 25% of the cost of projects, which can raise at least 50% of the cost from bonds, bank loans, and Public-Private Partnerships.
This long-term reform-oriented scheme reflects an overarching policy objective of the Union government to encourage the ULBs (urban local bodies) to start raising infrastructure development funds on their own and reduce dependence on intergovernmental transfers. Experience, however, suggests that in the immediate term, only a few municipal bodies like Ahmedabad, Pune, and Pimpri Chinchwad with high credit ratings would be able to raise sufficient capital from the market to access the Challenge Fund. This would be an uphill task for most cities, and progress will be slow. Although municipal bonds have been in India since 1998, until now only 17 cities have been able to use the instrument to raise money.
It remains to be seen to what extent the Challenge Fund can induce the state governments to improve the creditworthiness of their ULBs through accounting reforms and financial empowerment.
Push towards digitalisation
The Union Budget has given a welcome push towards digitalisation by launching a National Geospatial Mission under the PM Gati Shakti scheme. This would go a long way in facilitating data-driven decision-making through the digitalisation of land records and better urban planning and design of infrastructure projects. Funding for the National Urban Digital Mission, which seeks to enhance urban governance through digital platforms, has also gone up marginally from Rs 1,150 crore in FY 2024-25 to Rs 1,250 crore in FY 2025-26.
However, it remains questionable how the Integrated Command and Control Centres (ICCC) established in 100 cities under the Smart Cities Mission will be operated and maintained. The ICCCs are nerve centres of modern urban management and are vital to efficiently running city services through real-time data monitoring. The ambitious Smart Cities Mission, which was launched in 2015 and raised high hopes about transforming Indian cities, has now ended, as no funds were allocated in the current budget. It must be realised that making cities smart is a long-drawn and continuous process. Unless a sustainable financial mechanism to support the ICCCs is framed quickly, the expensive assets created may start declining as most ULBs in India do not have adequate financial capacity to run these facilities on their own.
Social welfare and affordable housing
In recent years, India's rapid urbanisation has led to a growing demand for a livelihood support programme to address the vulnerabilities of the urban poor. While rural employment schemes like MGNREGA provide a safety net, urban informal sector workers lack similar protections, making them highly susceptible to economic shocks, as seen during the COVID-19 pandemic. Partly responding to the demand, the NDA government launched the Pradhan Mantri Street Vendor's Atma Nirbhar Nidhi (PM-SVANidhi) scheme in June 2020 to provide micro-credit facilities to street vendors. Allocation for the fund had reduced from Rs 444 crore in FY 2024-25 to 373 crore in FY 2025-26. Similarly, the allocation for the affordable housing programme Pradhan Mantri Awas Yojana-Urban, the largest centrally sponsored scheme, has also decreased from Rs 30,170 crore in FY 2025-25 to Rs 19,794 crore in FY 2025-26.
However, the budget cuts in the welfare schemes may be part of a restructuring process. PMAY-U 2.0, the upgraded version of the flagship affordable housing scheme, received a budgetary allocation of Rs 3,500 crore. Another Rs 2,500 crore was set aside for Industrial Housing, a first-of-its-kind programme targeted to benefit industrial workers. In her budget speech, the Finance Minister also mentioned that the PM-SVANidhi scheme is being upgraded with additional features, and a new programme will be launched for the socio-economic upliftment of the urban poor. We have to wait and see how this name programme shapes up.
Policy continuity
To sum up, the Union Budget 2025-26 reflects policy continuity—but the need of the hour is a decisive step towards a green transition. While the budget takes progressive steps in infrastructure, metro rail, and digital governance, it misses the mark on climate resilience. It has not made any specific financial commitment to reducing environmental risks in our city systems. If urban development prioritises concrete over climate resilience, the foundation of India's economic ambitions could be at risk.
Tathagata Chatterji is a Professor (Urban Management and Governance), School of Human Settlements, XIM University, Bhubaneswar. Views expressed here are the author’s own.